RORO - The New Market Paradigm?

[timsk]

Risk On - Risk Off (RORO) is a new way off looking at different asset classes. This video lasting 6 or 7 minutes outlines the basic principles and the report referred to by the interviewee is this one: View attachment Risk On Risk Off.pdf

Clearly, it has implications for large institutions and investment managers, but could it also form the basis of trading strategies for little retail minnows like most of us? Thoughts anyone?

 

[Liquid validity]

Interesting thread
I know some laugh at RORO as just another flavour of the month buzzword.
Nevertheless, it does have value.

Yes , there is no reason anyone can't use the same methods.
What I found most interesting was the theory on RORO cause (end page4).
They say RORO is either linked to global uncertainty or RORO will remain indefinitely.

There is a lot of research by Nanex amongst others that could also link the rise in
algo trading to the phenomenon. Question is, are algos just being driven by RORO,
or are they themselves responsible for exacerbating the conditions.
One thing is for sure, they are not responsible, I'm not suggesting that.
I do however think they play a very big part in the lockstep correlations we see.

Is it merely coincidence that algo trading has really taken off from 2007?
It could be argued that the ultra short term HFT approach is just the best way
for a lot of the bigger players to mitigate risk in uncertain markets.

For me, the two are inextricably linked.
If I am right (not that it matters) RORO could remain for as long as algo, in particular HFT trading remains.

 

[Liquid validity]

The writing may be on the wall for HFT in its cuurent legitimised front running form anyway:
SEC Charges New York Stock Exchange For Improper Distribution Of Market Data
http://sec.gov/litigation/admin/2012/34-67857.pdf
Nanex ~ 16-Sep-2012 ~ SEC Speaks "Nanex"

Be interesting to see how this pans out, notable that NYSE have thus far rolled over...

 

[scose-no-doubt]

Old news, Timsk.

 

[timsk]

Old news, Timsk.

Not that old s-n-d, the pdf was only published in April! Besides, there are no threads on it that I can see - but it's difficult to search for as the engine appears not to be able to see beyond the word 'risk'. So, if you've investigated RORO and come up with some great insights - hit us with 'em!

Tim.

 

[wackypete2]

For those of us who have been trading for a while RORO is nothing more than "Basket Trading" in the 70's & 80's, and "Program Trading" in the 90's and 2000's

It's a new buzzword for an old concept.

I know some laugh at RORO as just another flavour of the month buzzword.
Nevertheless, it does have value.

I would almost fit that category
The concept does have value, I agree. What is laughable though is that traders believe that RORO is the latest new concept in trading. It isn't, it's just repackaged with a new name.

Peter

 

[Liquid validity]

For those of us who have been trading for a while RORO is nothing more than "Basket Trading" in the 70's & 80's, and "Program Trading" in the 90's and 2000's

It's a new buzzword for an old concept.



I would almost fit that category
The concept does have value, I agree. What is laughable though is that traders believe that RORO is the latest new concept in trading. It isn't, it's just repackaged with a new name.

Peter

Fair points
Its not so much RORO I was interested in, more the effects of algo trading in
these conditions.
No surprise that I heavily buy into the research Nanex does.

Nanex ~ 14-Sep-2012 ~ Disturbing Liquidity
Thats more of an example of what I was commenting on,
yeah RORO, basket trading, program trading nothing new.
The point I was making is the behaviour of risk aversion / appetite
this time round has been altered by the effects of algo trading.
The above nanex link shows liquidity drying up as if someone hit a switch.

Its those kind of things that are new.
Whether or not anyone cares or is affected is another issue

 

[timsk]

For those of us who have been trading for a while RORO is nothing more than "Basket Trading" in the 70's & 80's, and "Program Trading" in the 90's and 2000's

It's a new buzzword for an old concept.

Hi Peter,
I suspect that Stacey Williams - the author of the pdf - would beg to differ and point you towards the heatmaps to back up his point. The level of correlation between different asset classes is much higher now than it was pre the 2008 banking crises. His assertion that there are investment managers out there who think they have a diversified portfolio but, in reality, have anything but - makes sense to me.

Anyway, regardless of how old the news is and/or whether or not it's just old ideas repackaged with fancy buzzwords, is the basic principle valid and how can retail traders incorporate that principle in their trading to minimise their risk exposure?
Tim.

 

[wackypete2]

The level of correlation between different asset classes is much higher now than it was pre the 2008 banking crises.

Tim, I agree with this. But a higher level of correlation is not anything new, it just a correlation that was tweaked by technology (ie:repackaged) and branded a new name. Liquid Validity makes a good point about risk behavior being altered though.

His assertion that there are investment managers out there who think they have a diversified portfolio but, in reality, have anything but - makes sense to me.

Yes, makes sense. The problem with today's investment managers is many of them did not go through the crash of 1987. Even the best managers back then who thought they had a diversified portfolio didn't fare much better than the average investor who picked 2 or 3 stocks = very high correlation back then. You wouldn't believe how many portfolio managers today don't realize a good diversified portfolio means having cash on hand. When the market is going up, up, up everyone ends up "all in" or near so to get the highest returns. When the markets takes a violent turn these guys suffer badly = poor diversification.

Retail traders are even worse at understanding diversification. Honest to goodness, Tim, I know someone who owns a few stocks and futures and thinks his holdings are diversified. Turns out he has Apple, Google, and Nasdaq index futures. For traders, the way to take advantage of this highly correlated era is to find 2 or more products that always follow an index future. This is actually easier today due to the higher correlation. In a lot of cases one will generally lag the other. No free lunch though and it does take some work.

Peter

 

[ZEN archer]

Risk On - Risk Off (RORO)

Clearly, it has implications for large institutions and investment managers, but could it also form the basis of trading strategies for little retail minnows like most of us? Thoughts anyone?

I would say POPO (that's a new one - can't be found on Google as yet) has been driving the markets together with mad computers (algos and HFT)

BTW popo = printing on printing off

 

[Liquid validity]

I would say POPO (that's a new one - can't be find on Google as yet) has been driving the markets together with mad computers (algos and HFT)

BTW popo = printing on printing off

Thats pretty much what caused the rapid liquidity evaporation shown in the link I posted earlier.

Here is a more normal example of liquidity drying up prior to news:

More examples:
Nanex ~ 29-May-2012 ~ eMini Depth of Book
Nanex ~ 17-May-2012 ~ ES.M12 - 10:00 News/Liquidity Vacuum & Explosion
Nanex ~ 20-Jun-2012 ~ ES.U12 Heat
Nanex ~ 06-Sep-2012 ~ EMini Depth at 8:30am

***************************************************************************************************
***************************************************************************************************

Here's what happened last time helicopter Ben was about to speak:
FRB: September 12-13, 2012 FOMC Meeting

Nanex ~ 14-Sep-2012 ~ Disturbing Liquidity - source link.
I doubt anyone believes one firm controls 80% of the ES,
so what other conclusion is there, other than algo's adapting to each others
behaviour in the blink of an eye.

That why I believe this is the real root of the issue.
Yes conditions now are at least as risky now as in the 70's or 30's, maybe more so.
The above kind of behaviour would not have been seen in either of those decades though.

For anyone who thinks yeah who cares what happens a couple of mins before news.
You either don't trade then or have wide enough stops to accomadate the risk
if you are inclined to do so.

Nanex ~ 14-Sep-2012 ~ Disturbing Liquidity
There is more to that link than meets the eye.
It is just the most visible grapical representation of algo behaviour in these markets.
How many spikes do you think have occurred due to the same behaviour that go unnoticed...

 

[Liquid validity]

super wide images have busted the page formatting and can't edit last post :whistling

 

[ZEN archer]

I would say POPO (that's a new one - can't be foud on Google as yet) has been driving the markets together with mad computers (algos and HFT)

BTW popo = printing on printing off

I was trying to be funny and realistic at the same time

Retail traders can use POPO for their strategies. When Mr Bernanke announces bond buying (printing on), one can try to sell USD to put it simply. The only drawback is that others are printing happy, so may spoil the joy. And of course hated algos and HFT.

That's how I see the markets nowadays - politicians and computers being the major driving force.

 

[Liquid validity]

I was trying to be funny and realistic at the same time

That's how I see the markets nowadays - politicians and computers being the major driving force.

?
I agree with you, I wasn't having a pop
Just showing an example of what you said.

 

[ZEN archer]

?
I agree with you, I wasn't having a pop
Just showing an example of what you said.

I know LV - I was posting that without seeing your examples (I'm a slow poster)

Thanks for the examples

 

[scose-no-doubt]

I reckon you guyses are right about these markets are driven by policy now. Economic numbers come out and paint a bad picture and it's all risk off. Policy response = risk on. Handling the vol is the only hard thing these days and unfortunately I have no idea how to deal with that bit lol

 

[counter_violent]

I reckon you guyses are right about these markets are driven by policy now. Economic numbers come out and paint a bad picture and it's all risk off. Policy response = risk on. Handling the vol is the only hard thing these days and unfortunately I have no idea how to deal with that bit lol

That's the easy bit.
Just ensure you have a number of instruments available on both sides of the divide. So if you get in a spot of bother on one side, you can hammer the other side. It's all about being biased stake in current direction.

Might help if you open a trading account at some point

 

[scose-no-doubt]

Might help if you open a trading account at some point

I've been tinkering with this idea actually...

 

[DionysusToast]

What is interesting about the PDF is that it talks about Asset Allocation being dead and RORO being the new paradigm for INVESTING. For anyone with long-term money, this is of course something that will pique your interest.

The suggestion is that everything has become so correlated and traded by computers that the traditional idea of investing in different sectors has broken down. All sectors move in unison and it's all based on RORO.

Where I struggle with this concept as a new investment paradigm is that risk is on one day and off the next. I mean really, what's occurring, there? Long Term money decides risk is on one day - piles into stocks and the next day they realize they were wrong and get back out again? They sound a bit fkin stupid if that's what they are doing! I don't think so. It's speculation and (shout me down) manipulation. Risk is off - sell, sell, sell - Risk is on - buy, buy, buy. The brokers must be having a field day.

In terms of the ES - well - 1-2 days out of 10 it will trend up/down all day. The remaining days it'll go up then down OR it'll go down then up. Perhaps RORO tells us which it will do first...

 

[Liquid validity]

What is interesting about the PDF is that it talks about Asset Allocation being dead and RORO being the new paradigm for INVESTING. For anyone with long-term money, this is of course something that will pique your interest.

The suggestion is that everything has become so correlated and traded by computers that the traditional idea of investing in different sectors has broken down. All sectors move in unison and it's all based on RORO.

Where I struggle with this concept as a new investment paradigm is that risk is on one day and off the next. I mean really, what's occurring, there? Long Term money decides risk is on one day - piles into stocks and the next day they realize they were wrong and get back out again? They sound a bit fkin stupid if that's what they are doing! I don't think so. It's speculation and (shout me down) manipulation. Risk is off - sell, sell, sell - Risk is on - buy, buy, buy. The brokers must be having a field day.

In terms of the ES - well - 1-2 days out of 10 it will trend up/down all day. The remaining days it'll go up then down OR it'll go down then up. Perhaps RORO tells us which it will do first...

Good points, pretty much agree there.
Thats the thing (for me anyway) RORO (or whatever else you want to call it) is not the cause - its the effect.

You know I've mentioned this in the past, my theory is that HFT front running
algos create short term mini stampedes that the slower VWAP algos have to react to.
That creates momentum, until the HFT front runners decide to bolt the other way.
Rinse and repeat.

Ok the above is a simplistic model and just a theory.
As you can see from the links I posted earlier in this thread - particularly
the 13 sep FED announcement, 80% of liquidity is pretty much turned off instantly.

I believe thats why the SEC are starting to take the legalised front running
issue seriously now, that is the root causes if you ask me.